NZ dollar gives up gains on Fed balance sheet unwinding

The kiwi was trading at 72.78 USA cents as at 5pm in Wellington from 72.57 cents at the start of the day and from 73.12 cents late yesterday. The greenback extended overnight gains versus yen and euro after the Fed announcement.

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What did the Fed say?

No Fed officials dissented on the decision. They did, however, indicate that one more hike is possible before year-end.

“The basic message here is that U.S. economic performance has been good”, Fed chair Janet Yellen said at a press conference. She said several factors have held inflation down: A job market still healing from the Great Recession, lower energy prices and a strong dollar, which has reduced the costs of imports.

The Fed kept its interest rates unchanged in a target range of 1% to 1.25% on Wednesday, but two-thirds of the policy setting committee deem another 25 basis point rise by the end of 2017 as appropriate. The index ended the session at its lowest closing level in almost a month.

Something amusing happened at the September Federal Reserve meeting: The central bank’s resolve to raise interest rates appeared to rise, even as the bank’s own forecasts pointed to arguments against doing so.

Architas investment director Adrian Lowcock notes when the programme gets up to speed the Fed will be reducing its balance sheet by $600bn a year. But economic growth and low unemployment suggest they should act.

The Fed said the balance-sheet runoff would follow the framework released in June: $6 billion in Treasuries and $4 billion in mortgage-backed securities per month, rising every three months until the amounts reach $30 billion and $20 billion per month, respectively.

Nonetheless, US stocks rebounded quickly after a brief correction triggered by the ending of QE in October 2014.

To avoid spooking investors, the Fed’s plan for shrinking its balance sheet is so gradual that the total would remain above $3 trillion until late 2019.

The S&P and the Dow ended slightly higher on Wednesday, adding to their string of closing records, while the tech-heavy Nasdaq ended slightly lower weighed down by Apple.

Investors will be watching domestically for second-quarter gross domestic product figures which are expected to show economic growth accelerated to a quarterly pace of 0.8 percent from 0.6 percent in March. Brent crude, used to price worldwide oils, lost 12 cents to $56.17 a barrel in London.

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It looks to be a quiet day, with no major local economic data out today. The French CAC 40 Index advanced by 0.5 percent and the German DAX Index climbed by 0.3 percent, although the U.K.’s FTSE 100 Index edged down by 0.1 percent. The local currency increased to 91.66 Australian cents from 91.10 cents yesterday and gained to 4.8303 Chinese yuan from 4.7978 yuan.

Federal Reserve Chair Janet Yellen. – AP